論説 debt sustainability in the developing …ritsumeikeizai.koj.jp/koj_pdfs/67402.pdftions....

＊Chief Specialist, Public Dept Management Department, Ministry of Finance, Kyrgyz Republic＊＊Faculty of Economics, Ritsumeikan University, Japan

論説

Debt Sustainability in the Developing Countries :

Case Study of the Kyrgyz Republic

Sabina Kazakova＊

Kazuo Inaba＊＊

Abstract :

The main objective of this paper is to investigate the impact of external debt on

economic growth. This study is based on panel data for 117 developing countries for the

period 1981―2015 using OLS and fixed effect methods. The results reveal a nonlinear

relationship between external debt and economic growth. The marginal impact of debt on

economic growth, which can maximize growth, is 61.3 percent of GDP for total external

debt and 30 percent of GDP for public and publicly guaranteed external debt. In the long

term, the marginal impact of debt on growth is lower, namely 23.6 percent of GDP. The

result implies that exceeding the external debt of the above-mentioned levels leads to an

economic slowdown or reduction in growth rate in developing countries.

Keywords : external debt, debt threshold levels, economic growth.

�．Introduction

The challenges of external debt sustainability has become highly relevant after the

financial crisis, the consequences of which resulted in a significant increase in external

debt. In this situation, developing countries are particularly vulnerable, whose economic

and financial potential is lower relative to developed economies. Therefore, the preservation

of debt sustainability and the effective debt management in developing countries remain

relevant issues.

As many empirical studies reveal, external debt can have both positive and negative

impacts on economic growth, depending on its volume, application and certain conditions in

the country. The general theoretical assumption of public debt is that a reasonable level of

public debt has a positive effect on economic growth, and its further accumulation and

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Vol. 67 No. 418 THE RITSUMEIKAN ECONOMIC REVIEW Nov 2018

Real GDP growth rate, %

12

10

8

6

4

2

0

－2

－410 20 30 40 50 60 70 80 90 100 110 120 130 140

Ratio of public external debt to GDP, %

Figure 1 Optimum level of public external debt

growth has an adverse effect (Pattillo, Poirson and Ricci, 2002). This assumption suggests

that the impact of debt on economic growth can be described as an inverted U-shaped

curve, as shown in Figure 1, and assumes that the debt becomes unsustainable when it

exceeds a certain point (Afonso and Alves, 2015).

According to the definition of the International Monetary Fund “debt sustainability as a

situation in which a borrower is expected to be able to continue servicing its debts without

an unrealistically large future correction to the balance of income and expenditure1)

”（IMF,

2002). Based on the foregoing, the basic idea of the state of sustainability is the ability and

capacity of the country to serve debt without any difficulties over time and any delays.

The debt sustainability of countries is usually measured by debt and debt service

indicators scaled by relevant measures of repayment capacity (GDP, exports, revenues),

whose evolution over a certain projection horizon is calculated by the debt dynamics

(World Bank, 2016). These indicators reflect the solvency of the country and the ability to

timely fulfill all obligations from its own resources and are key elements of debt sustaina-

bility analysis.

Thus, the objective of this paper is to investigate the impact of external debt on

economic growth and to assess the ability of developing countries to manage debt for

economic development. As a main debt indictor, we examine the ratio of external public

debt to GDP, since a stable debt-to-GDP ratio usually manifests improving the govern-

mentʼs ability to service its debt and measures the burden on the economy.

This study addresses answers to the following two research questions : Is there a

nonlinear relationship between external debt and economic growth ? What is the marginal

impact of external debt on economic growth, above which the economic slowdown begins ?

Accordingly, this study hypothesizes that there is a nonlinear relationship between

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Debt Sustainability in the Developing Countries :Case Study of the Kyrgyz Republic (Kazakova・Inaba) 19

external debt and economic growth, and an excessive level of external debt begins to

negatively affect growth.

The structure of the paper is organized as follows. The next section is devoted to the

description of the current situation of debt sustainability in developing countries and the

Kyrgyz Republic. The third section reviews the previous literature. The fourth section

describes the methodology and data. The fifth section contains the main findings and their

interpretations. Then the conclusions are presented in the final section.

�．Debt sustainability in the developing countries

Public debt is an important element of the market mechanism, through which savings

are transformed into investments, stimulates economic growth and improves the welfare of

the people. That is why attracting external loans to support the economy is a common

phenomenon in the international capital market, and sometimes a necessity for many

countries in the world. However, in countries with a weak and backward economy, public

debt from a factor that should stimulate the development of production turns into a factor

that oppresses and impedes the recovery of the economy. Without an effective debt

management policy and adequate control measures, an excessive level of a countryʼs public

debt may well become a potential threat to national economic security.

As can be seen from Figure 2, the external public debt of developing countries and

countries with economies in transition in nominal terms has been increasing. Over the past

10 years, the total external debt stock has more than doubled, and since 2010, there has

been an increase in the indicator of external debt to GDP ratio. The main challenge for

many countries in the post-crisis period of 2007―2009 became a problem of high accumula-

tion of external debt. Total external debt stock of developing countries and countries with

economies in transition reached $6.8 trillion in 2015, or 25.5％ of GDP and 100.1％ of their

exports of goods and services. Debt service payments in 2015 amounted to $782 billion, or

about 11.5％ of debt service to exports of goods and services (United Nations, 2016).

The average level of external debt-to-GDP ratio (25.5％) indicates an acceptable level of

external debt burden for developing countries, but this indicator is highly differentiated

between countries.

The most commonly mentioned threshold value of the debt indicator is the criterion

established by the Maastricht Treaty in 1992, according to which the level of public debt

for the European Union (EU) countries should not exceed 60％ of GDP. According to Debt

Sustainability Analysis for Market-Access Countries (MACs), the required threshold level

of debt to GDP ratio is 60 percent for advanced economies and 50 percent for emerging

economies (IMF, 2013).

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The Ritsumeikan Economic Review (Vol. 67 No. 4)20

Figure 2 Dynamics of external debt in developing countries

1980 1990 1995 2000 2005 2010 2015

45

40

35

30

25

20

15

10

5

0

8000

7000

6000

5000

4000

3000

2000

1000

0

Total debt stocks, US$ bin. Total debt/GDP, ％

Source : Calculated on the basis of World Bank and IMF data.

Although the nominal amount of debt is generally lower in developing countries than in

developed ones, its growth rate is a serious concern for international financial organiza-

tions. Developing countries are more often faced with irregularities in payment schedules,

debt restructuring and debt crises. The World Bank and the International Monetary Fund

use a special tool, such as Debt Sustainability Analysis (DSA), to assess the debt situation

in low-and middle-income countries for countries themselves and donors. The DSA consid-

ers various indicators of the debt burden (the present value of debt and debt service).

According to DSA, each country is classified in accordance to its risk of debt crisis

through the quality of its policies and institutions.

As a case study the rest of this research describes the debt situation in the Kyrgyz

Republic. The Kyrgyz Republic is assessed as a country with a moderate risk of a debt

crisis (IMF, 2016). The Kyrgyz economy in recent years has suffered from the economic

slowdown. The situation caused a significant rise in public external debt and identified

problems of debt sustainability.

The history of the accumulation of external debt in the Kyrgyz Republic began in the

early 90s since the independence. At that time, the Kyrgyz Republic had just begun to

develop legal, administrative and institutional standards for external borrowing. For the

Kyrgyz Republic, the first priority was to mobilize the resources from any sources to

support the critical level of imports, to prevent a decline in production and to finance the

budget deficit. The ratio of the public external debt to GDP ratio increased sharply in 1999

due to a fall in the exchange rate after the Russian crisis (Figure 3). While economic

growth in the country was stable, the deterioration in the nominal exchange rate of the

som (the national currency of the Kyrgyz Republic) to the US dollar in 1998―2000 led to a

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Figure 3 Public external debt to GDP ratio

Source : Calculated based on data from the Ministry of Finance of the Kyrgyz Republic

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

140

120

100

80

60

40

20

0

（％）

130％

45％

64％

57％

sharp increase in foreign debt expressed in national currency. The situation was exacer-

bated by the lack of experience in external borrowing, management and a reliable system

of the monitoring of public external debt. Liquidity problems led to the restructuring of

public external debt in 2002 and 2005 within the framework of the Paris Club, which

helped alleviate the burden of external debt and reduce external debt from 109 percent to

GDP in 2002 to 45 percent in 2008. In 2001―2008, the introduction of a debt tracing system

and debt reporting system significantly improved the accounting and monitoring of public

external debt. However, the national budget worsened from 0.83 percent of the surplus in

2008 to minus 5 percent of the deficit in 2010, and at that time there was also an increase

in the external public debt to GDP. A sharp increase in the debt indicator can be

explained by the consequences of the global economic crisis and internal political instability

in the country, which led to an increase in government spending.

The public external debt accounted for US$3.7 billion or 56.6 percent of GDP in 2016.

The share of multilateral loans was 41 percent, and bilateral was 59 percent.

To date, for the Kyrgyz Republic, external borrowing remains the main source of

funding for priority measures : financing of the budget deficit, implementing structural

reforms in the economic sectors, and financing investment projects that contribute to the

revival of the economy.

)．Literature review

A large amount of literature is devoted to the issues of external debt sustainability, in

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which the authors use different methodologies to evaluate it. Since the issue of external

debt sustainability is a broad concept and includes a large number of indicators, the topic

of debt sustainability can be interpreted differently in each paper. It depends on the

authorʼs approach and specific research questions.

In most studies, issues of debt sustainability are considered along with economic growth.

The authors try to determine the positive or negative impact of external debt. The most

popular assumption in such studies is the existence of a linear negative relationship

between external debt and economic growth in developing countries. This is confirmed by

the study of Zouhaier and Fatma (2014), who established that external debt negatively

affects growth in 19 developing countries over the period 1999―2011. In addition, they

found the same negative interaction between external debt and investment.

Some researchers support the existence of a nonlinear relationship between external

debt and economic growth, according to which a reasonable level of debt contributes to

economic growth, and its further increase hinders (reduces) economic growth. Nonetheless,

there are still ongoing discussions on external debt levels that maximize growth.

Pattillo, Poirson and Ricci (2002) investigated the nonlinear impact of external debt on

economic growth by using panel data of 93 developing countries during 1969―1998. The

main findings of this paper are that the average impact of debt on GDP growth becomes

negative above 160―170 percent of exports and 35―40 percent of GDP. The marginal

impact of debt becomes negative with much lower levels of debt, which is half of the

average values.

Demchuk (2003) reviewed the impact of external debt on economic growth in the 21

transition countries during the period of 1994―1999. He found an inverted U-shaped

relationship between debt and growth ; the optimal level of debt, which maximizes

economic growth, is from 11 to 18 percent of GDP ; the negative average impact of debt on

growth belongs to the range of 16―35 percent of GDP.

In connection with the expansion and availability of data on public debt (central

government debt), Reinhart and Rogoff (2010) conducted a study on 44 advanced and

emerging economies covering about 200 years. Their results show that economic growth

worsens when the level of external debt exceeds 60 percent of GDP, and when the level of

external debt exceeds 90 percent, the growth rate is sharply reduced. This corresponds to

the fact that more than half of all defaults on external debt in emerging markets since

1970 happened at debt levels that would meet the Maastricht criteria of 60 percent.

Other studies of the IMF on debt issues, conducted by Clements, Bhattacharya and

Nguyen (2003, 2005), analyzed the relationship between debt and growth for 55 low-

income countries for the period 1970―1999. As a result, they found that the negative

impact of debt begins after the face value of external debt reaches more than 50 percent

of GDP, or the net present value of external debt is more then 20―25 percent of GDP.

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The following authors considered a nonlinear assumption in relation to public debt. Thus,

Jacobo and Jalile (2017) found a significant nonlinear relationship between government

debt and economic growth in 16 Latin American countries from 1960 to 2015. They believe

that public debt adversely affects economic growth when it reaches 64―71 percent of GDP,

while institutional variable (the democratic government) promotes economic growth.

Mencinger, Aristovnik and Verbic (2015) examined and evaluated the impact of public

debt on economic growth using panel data of 36 countries covering the period 1980―2010

for developed countries and 1995―2010 for emerging economies. They found that the debt-

to-GDP turning point, when the debt variable begins to have a negative impact on growth,

is 90―94 percent for developed economies and 44―45 percent for emerging economies.

In contrast to the above results, the following authors do not find evidence of a

nonlinear and an inverted U-shaped relationship between public or external debt and

economic growth. For instance, Presbitero (2005) mentioned that there are various

theoretical hypotheses about the influence of the debt stock and flow on investment and

economic growth, but they find no firm conclusion. They examine the relationship between

external debt, economic growth, and investment in 152 developing countries for the period

1977―2002. The authors find the following : the relationship between debt and growth is

linear and negative, and there is no evidence of an inverted U-curve ; debt service does not

directly affect growth ; high level of debt does not significantly reduce level of investment,

but reduces its quality and efficiency ; the impact of high debt in the poorest countries is

greater due to weak institutional quality and policies there.

Daud and Podivinsky (2012) analyse the impact of external debt on the economic

growth of 31 developing countries for 36 years. They do not find any evidence of an

inverted U-shape relationship in the debt growth model, so they tend to believe that the

negative relationship of debt with economic growth is robust.

Soydan and Bedir (2015) support the previous studies that state the linear relationship

between external debt and GDP growth. Their study cover the period 1985―2013 for 13

middle-income countries using common correlated effects (CCE). They indicated that

external debt adversely affects growth through the debt stock rather than debt servicing.

*．Data and methodology

In accordance with the research questions, the empirical study is carried out in two

stages. To answer the first research question, this study follows Patillo et al. (2002), who

used a quadratic specification in order to find a nonlinear relationship between debt and

growth. The regression model is as follows :

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GDP=β+βlnINGDP+βInDEBT+βlnDEBT+βEDUC

+βCPI+βOPEN+βFDI+ε， ⑴

Where :

GDP ―GDP per capita growth ;

lnINGDP ― Initial per capita GDP, measured in natural logs ;

InDEBT ―External debt to GDP ratio, measured in natural logs ;

lnDEBT ―External debt to GDP ratio in square, measured in natural logs ;

EDUC ―Mean years of schooling ;

CPI ―Growth rate of consumer price index ;

OPEN ―Openness indicator (export+import as a share of GDP) ;

FDI ―Foreign direct investment as a share of GDP.

Coefficients β, (i=0, ……, 7)―parameters of the model to be evaluated by the available

set of values of the variables, ε ― is an error term.

The next step is to get an answer to the second research question. What is the

marginal impact of the external debt indicator on economic growth ?

If we get confirmation of the nonlinear relationship between external debt and economic

growth, we can calculate the peak of the quadratic function that determines the marginal

impact of the external debt indicator, above which the impact of external debt on growth

begins to be negative. The partial derivative of equation ⑴ is calculated with respect to

external debt to GDP ratio :

dGDP

dlnDEBT

=β+2βlnDEBT=0 ⑵

Then solving equation ⑵ for the turning point of the external debt indicator, we get the

following equation :

lnDEBT*=−β

2β

⑶

This study is based on panel data for 117 developing and emerging economies for the

period 1981―2015. The data were calculated at five-year averages to avoid the impact of

annual short-term fluctuations. Mean years of schooling indicator were collected from the

Barro and Lee Dataset and the UNESCO Institute for Statistics, all other data are available

in the World Development Indicators database of the World Bank.

In order to investigate the impact of various forms of external debt stocks, we used two

types of disbursed and outstanding debt (DOD) : total external debt stock and public and

publicly guaranteed external debt stock. Public and publicly guaranteed external debt

includes only the debts of the national government, political subdivisions, autonomous

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Table 1 Summary statistics of model variables

Variable Obs Mean Std. Dev. Min Max

GDP per capita growth (％) 759 .079 .202 −1.263 1.242

Initial GDP per capita ($) 745 7,400 1,020 4,811 9,540

External debt to GDP (％) 742 3.841 .832 −.239 7.191

Education (indicator) 718 5.761 2.821 .3 12.18

CPI (％) 666 .150 .364 −.107 5.672

Openness (％ of GDP) 716 74.4 35.6 .198 266.6

FDI (％ of GDP) 724 3.5 4.8 −3.9 45.9

Table 2 Correlation matrix of model variables

GDP per

capita

growth

Initial

GDP per

capita

External

debt to

GDP

Education CPI Openness FDI

GDP per capita growth 1

Initial GDP per capita 0.0436 1

External debt to GDP −0.0928＊ −0.230＊＊＊ 1

Education 0.186＊＊＊ 0.673＊＊＊ −0.124＊＊ 1

CPI −0.394＊＊＊ 0.0451 0.0114 −0.0002 1

Openness 0.112＊＊ 0.280＊＊＊ 0.191＊＊＊ 0.379＊＊＊ −0.152＊＊＊ 1

FDI 0.226＊＊＊ 0.0827＊ 0.121＊＊ 0.249＊＊＊ −0.113＊＊ 0.461＊＊＊ 1

＊p＜0.05，＊＊p＜0.01，＊＊＊p＜0.001

public bodies and private debts guaranteed by public entity.

The descriptive statistics for each variable are given in Table 1.

According to the correlation matrix (Table 2), the correlation coefficients are rather low,

and the correlation between the external debt and economic growth coefficients is

significant and negative (correlation coefficient is −0.093).

.．Estimated results

Several regression models, such as OLS, a fixed effect and a random effect, were

evaluated in order to establish relationship between debt and growth. The Hausman

specification test is applied to determine between a fixed effect and a random effect that

showed a preference of a fixed effect model.

The result of Table 3 is based on a fixed effect model with a time specific effect for

total external debt as a percentage of GDP. This result based on available data and

calculations, shows a nonlinear relationship between external debt and economic growth. It

is confirmed that an acceptable level of external debt has a positive effect, and its further

growth (excessive debt level) has a negative effect on GDP growth.

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Table 3 Estimated results of effect of external debt on economic growth

(for the total external debt stock as a share of GDP)

Dependent variables : GDP per capita growth

Independent variables Model 1 Model 2 Model 3 Model 4 Model 5

Initial GDP −0.306＊＊＊

(0.0294)−0.275＊＊＊

(0.0283)−0.146＊＊＊

(0.0261)−0.152＊＊＊

(0.0262)−0.144＊＊＊

(0.0258)

External debt-to-GDP 0.182＊＊＊

(0.0462)0.350＊＊＊

(0.0513)0.176＊＊＊

(0.0488)0.183＊＊＊

(0.0494)0.163＊＊＊

(0.0501)

External debt-to-GDP2 −0.0230＊＊＊

(0.00626)−0.0411＊＊＊

(0.00669)−0.0223＊＊＊

(0.00645)−0.0234＊＊＊

(0.00658)−0.0198＊＊＊

(0.00665)

Education −0.00611(0.0159)

−0.00331(0.0128)

−0.00190(0.0129)

−0.00581(0.0126)

CPI −0.188＊＊＊

(0.0192)−0.189＊＊＊

(0.0191)−0.186＊＊＊

(0.0187)

OPEN 0.00130＊＊＊

(0.000338)0.000864＊＊

(0.000341)

FDI 0.00764＊＊＊

(0.00174)

Constant 1.892＊＊＊

(0.225)1.313＊＊＊

(0.230)0.788＊＊＊

(0.219)0.735＊＊＊

(0.220)0.718＊＊＊

(0.217)

year FE yes yes yes yes yes

Observations 729 664 595 573 568

R-squared 0.279 0.329 0.378 0.399 0.434

Number of Countries 117 116 110 109 109

Standard errors in parentheses＊＊＊p＜0.01，＊＊p＜0.05，＊p＜0.1

Almost all control variables are statistically significant at 1 percent level and in the

expected sign, with the exception of the education coefficient. This coefficient is supposed

to be significant and positive. On the contrary, the result shows the estimated coefficient is

insignificant and negative. Pattillo et al. (2002) also found the ambiguous impact of

education in their regressions, but in the fixed-effect estimations they received a negative

and insignificant education coefficient (school enrollment rates). Our result can be

explained by the fact that the indicator of mean years of schooling does not change and

remains on the same level for a long period of time and is quite low in low-income

countries.

The CPI and trade openness represent a macroeconomic condition. As expected, the

result shows that an increase in the coefficient of CPI by 1 percent leads to a drop in GDP

per capita by 0.19 percent. It is obvious that a constant increase in the level of inflation

creates uncertainty in the market and leads to a reduction in investment by economic

agents, thus adversely affects economic growth. Trade is statistically significant at 1

percent level, but the coefficient is low. Pattillo et al. (2002) also confirm a positive and

significant coefficient of openness indicator in most specifications with a fixed effect.

The coefficient of FDI shows it contributes to economic growth. The coefficient is

positive and significant at 1 percent level. Different authors use different types of invest-

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(for public and publicly guaranteed external debt stock as a share of GDP)


Independent variables Model 1 Model 2 Model 3 Model 4 Model 5

Initial GDP −0.296＊＊＊

(0.0296)−0.258＊＊＊

(0.0293)−0.142＊＊＊

(0.0265)−0.148＊＊＊

(0.0267)−0.138＊＊＊

(0.0263)

PPG external debt-to-GDP 0.0635＊

(0.0357)0.133＊＊＊

(0.0376)0.0680＊＊

(0.0304)0.0705＊＊

(0.0308)0.0577＊

(0.0306)

PPG external debt-to-GDP2 −0.0110＊＊

(0.00541)−0.0181＊＊＊

(0.00551)−0.0114＊＊

(0.00458)−0.0117＊＊

(0.00466)−0.00852＊

(0.00463)

Education −0.00996(0.0165)

−0.00570(0.0129)

−0.00448(0.0130)

−0.00791(0.0127)

CPI −0.199＊＊＊

(0.0189)−0.200＊＊＊

(0.0189)−0.197＊＊＊

(0.0184)

OPEN 0.00129＊＊＊

(0.000341)0.000858＊＊

(0.000343)

FDI 0.00814＊＊＊

(0.00174)

Constant 2.079＊＊＊

(0.227)1.685＊＊＊

(0.237)1.017＊＊＊

(0.213)0.969＊＊＊

(0.215)0.919＊＊＊

(0.211)

year FE yes yes yes yes yes

Observations 728 664 595 573 568

R-squared 0.266 0.283 0.369 0.389 0.424

Number of Countries 117 116 110 109 109


ment (private and public) in growth models that generally support economic growth.

Due to missing data in some variables, the sample size has been reduced to 568 (with

109 countries) from the original number.

Table 4 shows the assessment of public and publicly guaranteed external debt stock as

a share of GDP and growth using a fixed effect model with a time effect.

As in the first regression, the result confirms the nonlinear debt-growth relationship. All

coefficients have the same sign as in the previous regression with the significance of time

effects. The result indicates that an increase in the debt indicator, trade openness and FDI

leads to an increase in GDP growth, and an increase in the debt indicator in square and

CPI result in a decrease of economic growth.

The presence of a nonlinear relationship between external debt and growth makes it

possible to calculate the marginal impact of external debt (turning point), when the

growth is maximized. Thus, the marginal impact of the ratio of external debt to GDP,

when growth is maximized and above which GDP growth slows down, is estimated as

61.3 percent of GDP for the total external debt, and 30 percent of GDP for public and

publicly guaranteed external debt. This means that after these turning points, the impact

of the external debt indicators begins to negatively affect growth in developing countries.

Our obtained level exceeds the estimated result of Pattillo et al. (2002) on which this

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(for the total external debt stock as a share of GDP)


Independent variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Initial GDP −0.00387＊＊

(0.00187)−0.0102＊＊＊

(0.00249)−0.00966＊＊＊

(0.00274)−0.0104＊＊＊

(0.00275)−0.0104＊＊＊

(0.00279)−0.0101＊＊＊

(0.00281)

External debt-to-GDP 0.00108(0.0169)

0.000567(0.0158)

0.0853＊＊＊

(0.0309)0.0864＊＊＊

(0.0305)0.0873＊＊＊

(0.0311)0.0778＊＊

(0.0305)

External debt-to-GDP2 −0.00187

(0.00206)−0.00164(0.00191)

−0.0134＊＊＊

(0.00432)−0.0137＊＊＊

(0.00428)−0.0138＊＊＊

(0.00435)−0.0122＊＊＊

(0.00426)

Education 0.00348＊＊＊

(0.000979)0.00390＊＊＊

(0.00110)0.00319＊＊

(0.00119)0.00326＊＊

(0.00125)0.00214＊

(0.00125)

CPI 0.00750(0.0142)

0.0220(0.0171)

0.0220(0.0172)

0.0251(0.0165)

OPEN 0.000114(7.63e−05)

0.000120(8.09e−05)

0.000154＊

(7.76e−05)

FDI −0.000221(0.000944)

8.04e−05(0.000963)

eastasiapac −0.00580(0.00621)

latincarrib −0.00746(0.00566)

subsahafr −0.0148＊＊＊

(0.00471)

Constant 0.0693＊

(0.0388)0.0939＊＊

(0.0368)−0.0634(0.0578)

−0.0628(0.0571)

−0.0642(0.0579)

−0.0420(0.0582)

Observations 79 79 58 58 58 58

R-squared 0.292 0.395 0.355 0.382 0.382 0.492


study is based. The difference in the turning points can be explained by the difference in

the number of countries, control variables in the regression and the changes in the

structure of developing countries since then. At the same time Pattillo et al. (2002) note

that “it is very difficult to accurately estimate the turning point because of the limited

variation in the data between the growth experiences of countries with low indebtedness and

those with low-to-moderate indebtedness2)

”.

To assess the long-term effect of external debt on economic growth, we applied the

cross-country regression analysis with the same control variables, which is presented in

Table 5.

This method also confirms the existence of a nonlinear relationship between external

debt and economic growth. The coefficients are statistically significant, external debt to

GDP is at 5 percent level and external debt to GDP in square is at 1 percent level.

The marginal impact of external debt on economic growth in this regression is much

lower, namely, 23.6 percent of GDP. This means that in the very long term we should

expect a decline in economic growth already when the external debt to GDP reaches more

than 20 percent of GDP.

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However, as the literature review shows, it is rather difficult to determine the threshold

levels of external debt indicators because there are different points of view among the

authors regarding the threshold values at which external debt will be sustainable and

support economic growth. This task is especially challenging for developing countries,

which have sharply different levels of GDP development between economies, an unstable

economic system, weakly developed institutions, and political and social instability.

In the end, in order to better understand the relationship between variables in the

context of debt, this study considers the conditional effect of debt and economic growth

using a fixed effect model. According to the results, the interaction between debt and

openness indicator is statistically significant and negative in relation to GDP. This means

that trade openness might increase the effect of debt to reduce GDP growth. In turn,

interaction between debt, education and CPI is statistically significant and positive. This

means that education and the CPI decrease the effect of debt to increase GDP growth. If

everything is clear with trade openness and education, then the positive interaction of debt

and the CPI may be due to the fact that inflation reduces the purchasing power of money

and thereby reduces the burden of debt on the economy. In other words, inflation allows

the government to repay a debt with foreign currency (in most cases, dollars) that has

less purchasing power than those that were originally received.

Taking into account the socio-economic conditions, our results show that developing

countries can steadily develop at the level of total external debt of just over half of the

countryʼs GDP.

1．Conclusion

Despite the existence of various hypothesis of debt-growth relation, according to our

results, this study supports the nonlinear relationship between external debt and economic

growth. In particular, we found that this relationship is robust in terms of different

quadratic model specifications for developing countries.

The marginal impact of the external debt on economic growth, which can maximize

economic growth, is 61.3 percent of GDP for total external debt, and 30 percent of GDP

for public and publicly guaranteed external debt. In the long term, the marginal impact of

total external debt on growth is 23.6 percent of GDP. This means that if the external debt

exceeds the above-mentioned levels of GDP, this leads to an economic slowdown and

reduction in growth rate.

In addition, this study found that price stability and a favorable trade policy regime are

important macroeconomic conditions for short and medium term economic growth. All this

contributes to the creation of an enabling environment for investment and economic

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growth, and increases the capacity for debt servicing. The investments presented by FDI

in the models also support economic growth as an alternative fund of resources that do

not create debt, but they are not sufficient for long-term growth. The cross-country

regression results confirm that it is necessary to invest in education, since it is positively

associated with the growth rate in the long-term period.

At the same time, as the experience of different countries shows, a failure with proper

management of external debt can arise at any debt levels. This confirms that the

sustainable level of external debt is individual for each country, depending on many factors

and socio-economic conditions.

As for the Kyrgyz Republic, in 2017 its public external debt was 53.9 percent of the

countryʼs GDP. Theoretically, according to our results, the country exceeds the critical

value of the debt indicator. However, the country will not be able to abandon external

loans, as it lacks domestic funds to finance large-scale investment projects, as well as many

developing countries. In this situation, the country needs to develop a reliable debt policy

for effective debt management in order to avoid a strong debt burden on the economy.

Thus, the sustainability of external debt depends not so much on the level of debt

indicators as on the effective debt management taking into account the socio-economic

situation in the country. In addition to the empirical results of this thesis, the following

comments could be addressed for effective debt management.

2Constant monitoring of the accumulation of external debt in order to ensure the

sustainability of debt is indispensable. It is necessary to monitor the system of indicators

in general for a comprehensive assessment of the debt situation in the country ;

2The threshold level of external debt should be perceived as a signal for the application

of appropriate policy measures to avoid a strong burden on the economy in the short

run as well as in the long run ;

2Debt growth rates and external debt indicators should be specified on an annual basis

and regulated by law within acceptable safe limits, taking into account the socio-

economic situation in the country ;

2External borrowing should be used productively and efficiently to make a profit for full

and timely servicing of external debt.

Despite the fact that the study has reached its aim, it is necessary to note some

limitations. First, some data on the sample countries are not available, thus, the results

have suffered from missing data. Second, the study covers all developing countries, but

there is no division into debt levels of countries, also debt crisis in countries are not taken

into account, which can affect the results. The third limitation of this study is the lack of

necessary data for the Kyrgyz Republic and get individual results.

This topic requires further study to confirm and refine the results as over time

additional statistical information will be obtained, and structural changes will take place in

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the economies of developing countries.

Acknowledgments

This paper is a summary of the Master Thesis by Sabina Kazakova. The authors are grateful to

Professor Kang-Kook Lee for his constructive comments and suggestions. Any errors are solely the

authorsʼ responsibility.

Notes

1） IMF Assessing Sustainability (2002, p. 4)

2） Pattillo C., Poirson H. and Ricci L. (2002) p. 19

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